How a Couple Gained Confidence to Quit the 9-to-5 and Enjoy a Fun RetirementSubmitted by Reby Advisors on February 8th, 2018
At dinner celebrating their 30th wedding anniversary, as Kevin and Julia reminisced about everything they had accomplished together, Julia broke the ice on a topic they hadn’t discussed in a long time: When could they finally afford to retire and make their lifelong dreams a reality?
Julia is practical. She wasn’t talking about buying a yacht, a home in the Hamptons, and an estate in Naples – though she wouldn’t have minded if those things were within reach.
What she really wanted was to quit the 9-to-5, afford a few nice vacations each year, own a modest boat again (they’d sold theirs years ago to save for the kids’ college), and simply enjoy life without financial worry. After decades of working, saving and raising kids who (hopefully) could support themselves in the near future, she felt they deserved that much.
Would "Life" Get in the Way of Their Dreams?
Conversations about retirement and fulfilling dreams are often pleasant, but as John Lennon said, "Life is what happens to you while you’re busy making other plans."
Here are some of the challenges Kevin and Julia faced:
- Though their oldest son recently graduated from Notre Dame, their youngest, Luke, was headed to Berkeley in the Fall; four more years of private school tuition!
- Julia wanted to retire at age 60, before Social Security benefits would be available to her.
- They weren’t spendthrifts but as they achieved professional success, they’ve grown accustomed to a higher standard of living.
- They wanted to help their kids by leaving an inheritance and contributing to major expenses like future weddings.
Could they afford all of this? How much give and take was necessary? Would they have to delay retirement or sacrifice major goals?
Planning a Fun, Financially Secure Retirement
Kevin and Julia were able to figure things out, on their own, with the financial planning software that Reby Advisors has now made available.
The first step towards building your financial plan within the software is clarifying your goals, expectations, and concerns at a very high level. It’s best to do this as a couple if you’re married, because you’ll be working towards these goals together as a team.
Consider not only the activities and purchases that cost money, but also the general lifestyle goals you have, like “less stress” and “time with friends and family.” The software comes preloaded with common goals to make this process simple and fast.
Below is a screenshot from Kevin and Julia's plan:
Next, you enter the concrete objectives that support those goals. For example, Julia wanted to retire at age 60, and Kevin is aiming for semi-retirement at age 63 when he'll transition to practicing law part-time (to keep his mind active and earn additional income).
Then there’s all of those fun “bucket list” items you're looking forward to. Julia and Kevin want a vacation home in the range of $250,000, a boat for $40,000, and annual travel costing $10,000 per year – to name a few.
It’s important to rank these by “Needs,” “Wants,” and “Wishes.” How you classify each objective is purely subjective. Kevin and Julia, for example, consider their annual travel expenses and Luke’s tuition to be Needs, and their vacation home as a Want. It could easily be the other way around depending on your perspective of who should pay for college.
How Should They Invest to Pay for Retirement?
How you invest your savings, of course, is a major part of retirement planning – particularly as it relates to how you’ll get income after you stop receiving a paycheck. Knowing your risk profile as an investor may be as important as the returns you get for three reasons:
1) you need to be conservative enough to be able to sleep at night;
2) you need to be aggressive enough to generate enough income; and
3) if you take on more risk than you can stomach, you’ll likely make behavioral investing mistakes down the road.
Kevin and Julia discovered their risk score was a 50. They can stomach a 21% loss in a given year. Anything more than that would cause great worry. Below is a screenshot of the Risk Score calculated by the planning software, based on a few simple questions:
Identifying Mistakes in the Plan Before Making Mistakes in Real Life
Factoring in all of these variables, the program stress tests your assets against 1,000 possible economic scenarios. Kevin and Julia achieved all of their goals in 240 out of the 1,000 trials.
This means there’s only a 24% chance they will be able to fund all of their goals.
As you might expect, Kevin and Julia found the low score a little depressing. They now wanted to see what tweaks they could make to their financial plan so they could improve on that and be confident in their plans to retire.
How Much Do They Need to Save Now to Retire Early?
During setup of the plan, they had noted they could each set aside an additional $25,000 per year in a non-retirement account. This isn’t something every couple can do, but as good savers with very aggressive goals to retire before Social Security kicks in, they decide to see how maxing out their savings impacts their plan:
It moved the needle to 40% Probability of Success, but that's not enough to be confident.
How Large of an Inheritance Can They Leave Behind?
Another big impact change is needed, so Kevin and Julia reduce their inheritance goals from leaving $2 million to their kids down to $1 million:
64%. Getting closer but not quite "there."
Can They Retire "on Time" or Should They Delay Retirement?
Now they see what happens if they each work one additional year (and retire at 61 and 64):
Delaying retirement by one year each gets them into the "Confidence Zone."
However, something just doesn’t feel right about that. Julia really wants to retire at 60 and to have Kevin semi-retired along with her at that time (he’ll be 63).
Can They Afford a Vacation Home for Retirement?
What happens if they keep their retirement ages at 60 and 63 but eliminate the vacation home?
Again, they’re in the Confidence Zone, but giving up on that vacation home still doesn’t feel right. The more they imagine retirement without it, the more it feels like a Need.
Choose the Option That Works Financially and Feels Right, Too
Kevin and Julia realize that it comes down to making one big shift in the plan or making a modest but consistent reduction in spending, every year of retirement. They adjust their plan to keep the vacation home and the original retirement date, but instead scrap the boat idea (which would also reduce their living expenses by $10,000 annually).
Now they're back to 76% Probability of Success, which we consider a good place to be.
The boat was a Wish on their original goals board, so they feel better about leaving that off their plan than anything else.
What other options do they have?
Fulfill Personal Dreams or Leave an Inheritance?
The alternative for Kevin and Julia is simply focusing on their own lifestyle goals and leaving the inheritance as a Wish. If they go ahead and buy the boat but exclude leaving a legacy as a goal…
Does this mean the kids get left out? Not necessarily.
In fact, in the current plan that factors in all of the couple’s Needs, Wants, and Wishes… the middle of the road scenario, the one that’s most probable if the future ends up being similar to the past, is that the couple will have more than $2.8 million in their accounts at the end of the plan (we always factor in the rising cost of living, so $2.8 million in the year 2058 is only $1.1 million in today's dollars).
The portfolio value chart is shown below:
The reason the program had continually told them they had a low Probability of Success is because they may not have the full $2 million (adjusted for inflation) at the end of their plan. To be honest, we advise most of our clients to put their own lifestyle goals ahead of the inheritance goals.
Special circumstances aside, if you’ve done a great job of parenting, the kids will be fine either way. Chances are, they want you to get the most out of your retirement. They don't want to be the reason you didn't achieve your dreams.
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